Air Force Deal Could Cost European Jobs
Airbus' contract with the Pentagon for in-flight refueling aircraft may lead to an accelerated exodus of jobs to Asia and the U.S.
Trans-Atlantic relations don't have to be contentious when money is at stake. Last Wednesday evening, Henry Kissinger, éminence grise of American foreign policy, was campaigning for donations to rebuild the Berlin city palace -- a royal residence heavily damaged in World War II and demolished by the Communists -- in faraway Germany.
At a charity dinner at the German embassy in Washington, Kissinger said that in New York, where he lives and works, there is little understanding for the fact that he is raising money for Berlin. But if the donations start adding up, he promised a high-level visitor from the United States at the 2015 opening of the palace: John McCain will show up, he said, "as a president, then in his second term." The comment was met with polite chuckles and a toast to common interests.
But as cozy as Kissinger's event was, a cold trans-Atlantic wind was blowing across the country at the same time. Last week, the US Defense Department announced it was awarding the second-biggest contract in its history to a consortium that includes the European Airbus Group, leaving domestic aviation giant Boeing on the outside looking in. A political flap among politicians of all stripes quickly ensued, with calls for the contract to be reviewed and warnings that US national security may be at risk.
On its surface, the deal looks simple enough -- the contract is for several hundred in-flight refueling aircraft. But days of protest have made it clear that the issue at stake is more one of production locale than logistics -- and the formula of global economic power.
In Chicago, home to both Boeing's headquarters and Democratic presidential candidate Barack Obama, the Senator recently said that he could not believe that "an American company that has been a traditional source of aeronautic excellence would not have done this job." His Democratic rival, Hillary Clinton, said that she was "deeply concerned about the Bush administration's decision to outsource the production of refueling tankers for the American military." Her fellow Democrat, House Speaker Nancy Pelosi, agreed and wondered aloud about the "national security implications of using an aircraft supplied by a foreign firm."
Meanwhile, Republican presidential candidate John McCain was surprisingly cautious in his remarks. He merely said that he was "interested to learn how the Air Force came to its contract award decision here and whether it fairly applied its own rules in arriving at that decision," adding that he wanted to examine the details of the deal before commenting on it. Nevertheless, the Republican Party base is incensed.
Many consider the contract award to be unpatriotic. A deep-seated fear of globalization has taken hold among large segments of the population. For many Americans unrestricted world trade, a sign of imperial strength not too long ago, is now seen as a threat.
In a recent survey conducted by the Washington Post, 80 percent of respondents in heavily industrialized states like Ohio believe that free trade is the main cause of job outsourcing. With voters loudly demanding protection for their jobs, politicians have been eager to take up the issue. In short, the potential political success of those currently running for America's top political job have come into direct conflict with Airbus' success on the global marketplace -- and the success of that marketplace itself.
It is a divergence that has been coming for some time. Blue collar laborers in the US are unhappy and have seen the number of industrial jobs in the US decline by a third in the last three decades. Most of these jobs were lost in traditional working-class states like Ohio, Michigan and Illinois. The United States, once the world's largest net exporter, has racked up an enormous balance of trade deficit. And now even the federal government, by awarding major contracts to foreign companies, has given the appearance of having lost confidence in domestic industry.
Boeing is currently considering a legal challenge to the Airbus deal. But should the court come to the conclusion that everything about the contract was perfectly legal, it could provide Americans with an unmistakable confirmation of something experts have been saying for years: that the competitiveness of the US economy has declined dramatically.
Almost everything Americans need in their lives today is imported. Shrimp comes from Thailand, television sets from Taiwan, toys from China, and now the Pentagon will be importing some of its equipment from Europe. Until now, the job of outfitting the US Armed Forces was sacrosanct -- and reserved for domestic manufacturers. The Pentagon's decision to award portions of the Air Force contract to a European company is thus both a provocation and a violation of a taboo -- precisely because it was based on the strictest of quality specifications for the products of both manufacturers.
Furious US lawmakers convened last Wednesday for a special session of the House Defense Appropriations Subcommittee. "I think the Air Force has made a big mistake," Norm Dicks, a congressman from Washington, where Boeing has most of its production, said resentfully. An American tanker should be built by an American company with American workers," said Rep. Todd Tiahrt, from Kansas where Boeing also has some facilities. Democratic Congressman John Murtha, the chairman of the House Defense Appropriations Subcommittee, threatened: "This committee funds this program, and all this committee has to do is stop the money, and this program is not going to go forward."
It was a moment of glory for the demagogues and polemicists. "Having made sure that Iraq gets new schools, roads, bridges and dams that we deny America, now we are making sure that France gets the jobs that Americans used to have," said Rep. Rahm Emanuel of Illinois.
Powerful California Congressman Duncan Hunter even speculated that the revenues from the contracts "benefited the treasuries of European governments," adding "these are the same European governments who are unwilling to support us in the global war on terror." Republican Senator Sam Brownback warned that US soldiers might have to learn French in the future to be able to operate their equipment.
Oddly, though, the mood isn't quite as jubilant as one would expect across the Atlantic Ocean in Europe. German Chancellor Angela Merkel did refer to the US Air Force deal as a "huge success." But Airbus' new customer may give the company the push it has been waiting for to implement its new strategy. For months, the airplane manufacturer has been talking about increasing its production capacity in the dollar zone. Airbus workers, already nervous as a result of the company's far-reaching cost-cutting measures implemented last year, are far from euphoric.
Part 2: Will the Airbus Deal Cost European Jobs?
The move away from Europe got underway in earnest earlier this year. Just after the start of the year, EADS CEO Louis Gallois gave his traditional New Year's address at EADS subsidiary Eurocopter, located in the Bavarian town of Donauwörth. Gallois was there to convey two messages. First, he said, he wanted to express his gratitude to the workers from Donauwörth. Then he added that the group plans to shift significant portions of its production to the dollar zone.
In the medium term, the Frenchman said, at least one-fifth of the group's workforce will be working in factories far away from Europe, mostly in Asia and the United States. Such a shift would represent a major change for the company -- until now, an impressive 97 percent of employees at EADS and its key subsidiary, Airbus, have held European passports.
Gallois also said that the group plans to procure both parts and complete subassemblies outside Europe in the future, thereby protecting itself against further decline of the dollar. The US currency remains the principal form of payment in the aviation business today. When the dollar falls, so do the Europeans' profits. Meanwhile, EADS still pays 70 percent of its costs in euros.
Until recently, though, it seemed as though the Gallois speech at Eurocopter was one more intended to indicate what the future might hold than impending reality for Airbus' German, French and Spanish workers. Now his plans, grandiosely dubbed "Vision 2020" within the company, will become reality sooner than expected.
The forerunner of the trans-Atlantic shift is the EADS research and development center in Mobile, Alabama. Roughly 90 US engineers are already engaged in research for the European plane maker. The current plans call for the tanker version of Airbus's successful A330 model to be assembled in Mobile, where Northrop Grumman, the company's US joint venture partner, will install the electronic systems. But the plans go even further than that.
In late January, not long before the US Department of Defense awarded the contract to EADS, Airbus CEO Thomas Enders paid a visit to Alabama to lay additional bait. Should the Airbus and Northrop Grumman joint venture win the Air Force contract, he said, Airbus would also assemble cargo versions of the A330 in Mobile in the future.
But this doesn't necessarily mean that Airbus will stop there. Once production has gotten successfully underway in Mobile, this provincial city could conceivably become Airbus' fourth-largest assembly site for passenger aircraft, next to Hamburg, Toulouse and Tianjin, China. "There are no such plans at present," says and EADS spokesman. Not yet, that is.
The Europeans owe their acceptance as serious contenders for the multibillion-dollar contract to more than just their tenacity and systematic lobbying efforts. Boeing, after all, is no stranger to aggressive business tactics. Rather, the Europeans' success is partly due to luck -- but also to serious mistakes made by the competition.
Early on in the bidding, Boeing's credibility was damaged by a corruption scandal. A senior Air Force employee supplied Boeing with important, but confidential information. In return, she was to be offered a well-paying job at Boeing. The crooked deal was eventually uncovered, partly as a result of persistent inquiries by Senator John McCain.
The Air Force employee and a senior Boeing executive received prison sentences, and a short time later even the company's CEO resigned. Two men, in particular, recognized the opportunity that the corruption scandal held for EADS: Thomas Enders, the current Airbus CEO and the head of the company's defense division at the time, and Ralph Crosby, the then head of EADS's North American defense division.
Crosby, who had lost a bid for the top job at US defense contractor Northrop Grumman, was recruited by Enders and proved to be one of the best personnel investments that the EADS Group has made in its almost 10-year history. Enders and Crosby developed the master plan that eventually enabled the Europeans to secure the contract for the first 179 tanker aircraft -- and the opportunity to produce another 400.
It was Crosby, a self-confessed military buff, who recruited his former employer, Northrop Grumman, as a joint venture partner in the hotly contested bidding process, and then brought US engine maker General Electric on board as the third partner. Using a clever PR campaign, Crosby selected, from among more than two dozen contenders in the United States, the small city of Mobile as the site for an R&D center and for the later final assembly of the tankers. In doing so, he immediately gained the support of neighboring Mississippi. Many workers commute to Alabama from Mississippi, which holds its presidential primaries this week. Mississippi has also recently become the site of vocal clashes between supporters and opponents of the planned Airbus tanker deal.
Will Boeing executives at least prove to be good losers, or will they challenge the decision after all? Boeing CEO James McNerney and his colleagues have 10 days to announce whether they intend to file an appeal against the Air Force decision with the US General Accounting Office (GAO). The GAO will then have 100 days to investigate the deal. There are some indications that the Americans will attempt to block the decision in court.
One of the most perplexing issues is why Boeing selected its technically obsolete 767 long-range jet as the basis for its tanker bid. Jim Albaugh, the head of Boeing's defense division, justifies the decision by arguing that the call for bids never made it clear that the size and cargo capacity of the jets would be the most important factor. But it was precisely these aspects -- in which the A330 trumps the Boeing 767 -- that prompted the Pentagon to choose Airbus.
"We could also have offered our larger model, the 777," says Albaugh, "but we were dissuaded from doing so." Albaugh isn't naming any names -- not yet.
Translated from the German by Christopher Sultan
